InvestorQ : What does this report mean that Franklin Templeton has side pocketed its holdings in Vodafone Idea debt? Have the sold off the debt?
Aashna Tripathi made post

What does this report mean that Franklin Templeton has side pocketed its holdings in Vodafone Idea debt? Have the sold off the debt?

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Tisha Malhotra answered.
9 months ago
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Franklin Templeton Mutual Fund, one of India’s largest MF and among the few surviving global MFs, side pocketed its holdings of Vodafone Idea debt. Let me explain the concept of side pocketing for a minute before going further. Side pocketing is the creation of a separate portfolio in lieu of troubled debt. Existing investors can benefit from recovery in the bad debt through this separate portfolio while fresh investors will not. The NAV of the schemes will not change since Franklin Templeton MF has already written down the full value of the Vodafone debt. But whatever is recovered from the troubled debt will be like a bonus for the debt fund holders of Templeton. The fund house has also imposed a restriction of Rs.2 lakh per day per investor into the affected schemes. This is normal to protect the interests of the existing investors and to avoid trading on stressed debt.

The decision to side pocket was driven by the Supreme Court judgment which asked Vodafone Idea to pay up Rs.50,000 crore liability before the end of January. Templeton has already written down the value of these bonds by 100% so there is no further loss and the risk is already reflected in the NAV. The write down was voluntary because the credit ratings agencies had not downgraded the paper below investment grade (BBB rating). Side pocketing segregates bad debt and allows investors to exit the rest of the scheme without giving up on the chance of recovery in the bad debt. Fresh investors also cannot take advantage of recovery in the bad debt. On 24th January, CRISIL downgraded Vodafone Idea paper to BB, which is below investment grade leading to Franklin Templeton side pocketing its Vodafone Idea exposure.

If you are an investor in the scheme then you get two sets of units; in the good scheme and the side-pocketed bad scheme. The move is positive for existing investors since they will benefit from any eventual recovery in the bad debt in question and speculators will be kept out. While side pocketing is a genuinely positive move, it only underlines the fact that the risk of bad and dubious holdings in mutual fund portfolios is still rampant and the next few months could see a lot more skeletons falling out of the portfolios of MFs.

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